American rolled out new fare options this morning, offering add-ons like included checked bags, no charge for changes, and bonus miles for a fixed higher price.

Currently the new options are available for at AA.com and travel agencies set up for direct connect (and the fare display has been updated throughout the purchase process to support the changes), but these are not just packages of ancillary services that are being bundled, these are actual fares which include add-ons as a part of the fare. That means that any travel site that chooses to offer support for showing the fares will be able to sell them.

There are now three ‘categories’ of fares — outside of premium fares — at American:

• CHOICE: these are akin to American’s current fares. They’re the lowest price, come with a change fee, and continue to offer full mileage accrual. They haven’t taken anything away at this fare level.
  
• CHOICE ESSENTIAL: No change fees (although you’d still pay any difference in fare when making changes), one included checked bag, and group 1 boarding(+$68)
  
• CHOICE PLUS: All of the items included with Choice Essential plus 50% bonus miles, no fee same-day changes, no fee same-day standby, a premium beverage onboard (+$88)

When you book tickets at AA.com, fares are organized now by these categories (plus premium fares).

Mouse over the fare category and it will describe the benefits.

What does this mean? Although I don’t find the web interface an improvement, and would prefer the ability to pick and choose specific fare classes on the American website, the changes should be good business for American without taking anything away from customers.

I talked with Rick Elieson, American’s Managing Director of Digital Marketing, about the changes and to get some clarifications beyond the details offered in their press release.

They see the changes as huge, in a big picture ‘how do people buy airline tickets’ kind of way. He likened it to American’s introduction of ‘Super Saver’ fares in 1977, which ushered in the era of major airlines competing with discounters through price discrimination. And said this turned that on its head, by offering simple value propositions to consumers and taking the hassle out of the travel experience.

Ok, those are superlatives I wouldn’t quite apply. Instead, I think American is doing a pretty good job at getting into the bundling game. They’ll still offer extra services a la cart, but by offering packages of services at a discount compared to buying all items individually, they make more sales and more money overall.

It’s just like buying packages from your cable television company. One person values CNN at $100 and ESPN at $10. Another values ESPN at $100 and CNN at $10. If you bundle the two channels together you can sell them for $110, and earn $220. If you price them at $50 each you sell ESPN to one person, CNN to the other, and earn $100. (Price them at $100 each and earn $200, still less than $220 and at the same cost.)

Since it costs you virtually nothing to add a channel for a given consumer, the extra $120 is like free money. And both customers get the channels they want at a price they value. That’s why cable TV bundles. It’s why software companies bundle. And it’s why I’ve been saying we’ll increasingly see airlines bundling the services that have low marginal costs to provide more of.

This analysis is why I wrote back in March that in the future airlines would no longer charge separately for either inflight internet or checked bags. Time will prove me right or wrong, but American’s move here bolsters the argument I think.

With the new fare options, folks buying the lowest fares don’t lose anything they currently have. Unlike Delta’s new cheapest fares that don’t permit advance seat assignments.

American’s Strange — or Brilliant — Decision to Include Services in their Fares Instead of Selling Add-on Packages

In contrast to the Delta approach of taking things away from the lowest fares, selling more things for more money are the kinds of changes that Jeff Smisek thinks “you’re going to like” at United. Except that American is including those services in the fare itself. In each case, for each fare, there is a version of the fare which includes these packages. These aren’t add-ons, they’re actually things a customer is entitled to by virtue of their fare.

Frontier sells ancillary services, they do it through their website, and they punish consumers who book elsewhere. They want customer eyeballs to sell to them, and they want to reduce their distribution costs by cutting out the travel agencies.

American’s move will make it possible for online travel agencies to sell the ancillary services — since all they are doing is selling specific fares that are more expensive than the lowest, and include more ‘stuff’. Currently most online agencies just display the cheapest options (unless you specify things like refundability).

Elieson believes that other airlines will follow American’s move here, and what they’re doing will spread industry-wide. For an industry that does everything in copycat fashion, that’s not implausible. And if it’s correct, if it becomes standard, then the online agencies will need to introduce the functionality to sell these types of fares or else risk losing customers who want to be able to add bundled services. And since these services are part of the fare rather than an add on, they’re available only at purchase and not as something you can buy later.

It’s a big bet, though. Not only do they give up the opportunity to sell their bundles after initial purchase, by including things like baggage fees in the airfare, they subject the revenue to the federal government’s 7.5% excise tax on domestic airfare purchases.

One of the major reasons we’ve seen a spread of checked baggage fees is that everything that the airlines have been able to unbundle — everything that is charged for separately and not included in the fare — isn’t subject to that 7.5% tax. With this roll-out, American is potentially moving a whole lot of their revenue back inside the box of revenue which is taxed at a higher rate.

I wondered whether it was their attempt to avert the fiscal cliff, they responded that they think the risk is worthwhile.

Clarifying the Extra Benefits Each Fare Type Includes

These fares are being launched in the 48 contiguous states only, not Alaska or Hawaii, not international , not Puerto Rico. International tariffs are handled differently so presumably would be a whole different project, and I imagine that the Alaska and Hawaii markets are just considered ‘different’. Perhaps everyone checks bags to Hawaii, and so bundling wouldn’t be expected to increase revenue sufficiently or the price points would have to be different.

No change fees means you won’t pay the $150 service charge for changing the date or time of your ticket. If the new flights you want are more expensive, you’ll still pay the difference in fare. If you cancel your ticket, no fee applies, and you can apply the full value of your fare (yes, including the $68 or $88 add-on) towards a new ticket.

The included checked bag is actually one extra checked bag. I asked whether an elite member or a co-branded credit card holder who already get a bag or two without charge would see any benefit here and it was explained that whatever number of bags you’re already entitled to, this benefit gets you one more. So if you already have two checked bags at no charge, buying a fare that includes one means you receive three.

Fares will now be presented roundtrip and you cannot buy a different fare type in each direction. That is, you cannot buy a deep discount fare one way and a ‘choice essential’ or ‘choice plus’ fare the other way. The pricing add-on for choice essential ($68) and choice plus (an additional $20 on top of the $68 for a total of $88) are roundtrip prices. There’s no combining choice essential one-way and choice-plus the other, either. The only fare combination that’s possible is mixing and matching any choice, choice essential, or choice plus fare with a premium cabin fare.

They aren’t offering bundling on premium fares, that is a first class fare can’t be purchased with the extra checked bag and 50% mileage bonus. I have a question out currently to American about what happens if you bundle the Choice Plus package one-way (which is sold as roundtrip) with a premium fare the other, whether you’d get the bonus miles on the premium fare or not.

The 50% mileage bonus applies to the base miles earned for a flight, which means that elites will earn it off of the 500 mile minimum when that applies.

Premium seats aren’t included in any of the packages. Since these are fares and availability of seating on a given flight will vary, they didn’t want to offer something that would just be an ‘option’ to have a preferred seat if one was available. People would pay extra and wind up not having the seats available for selection, becoming very unhappy. Plus the pricing decisions are fairly complicated. Adding in another benefit that elites already receive for free would tend to make it even more likely that elites wouldn’t be willing to buy up to these higher fares.

Are These Higher Fares With Added Services Worthwhile?

Is it worth $68 not to have to pay a $150 change fee if you change your ticket, to get a checked bag, and to board with ‘zone 1’?

If you’re going to check a bag, you’re not an elite, and you don’t have an American Airlines credit card then I think the deal is worth it. Paying for a checked bag is cheaper but getting to board early enough not to have to gate check a bag is worth something too and saving in most cases $150 in the event of a change has a value that’ll vary based on the likelihood that you’ll make changes. I find I make changes more often than I’d like, and think I’d make them even more often if I didn’t face a $150 fee for doing so.

In each case it depends on your evaluation of how likely you are to use the services offered.

Once you convince yourself that the ‘Choice Essential’ fare makes sense, then the incremental $20 to buy up to ‘Choice Plus’ becomes pretty easy for all but the shortest trips. Any roundtrip where you’re flying 2000 miles (DC – Dallas and back with no connections exceeds that) will net you miles that may be worth the increment. And you get same-day changes and standby plus a cocktail (well, they have non-alcoholic premium beverages too but I have no idea what those are…) to make it all go down easier.

If you haven’t convinced yourself that Choice Essential makes sense you may still find Choice Plus worthwhile, again it all depends on how much you value each constituent piece of the offering and whether the total value you derive is greater than the price.

Are These Higher Fares With Added Services Worthwhile.. for Elites?

I can see how this could make sense for an elite who is doing a lot of flying on their ticket, maybe a connecting flight along with a cross country flight each way. That way the 5t0% mileage bonus could be valuable, worth as much as $60 perhaps. And then you’d be effectively prepaying your change/same-day confirmed change at a deep discount of $28.

But overall I don’t think this makes sense for elites who already get standby (though not free same-day confirmed changes) and checked bags as well as priority boarding.

So what’s the Best Strategy for an Easier Travel Experience?

As always, if you fly enough to earn status then concentrating your flying on a single airline can make good sense, you earn many of the benefits (checked bag, early boarding, standby) and don’t have to pay for them.

Interestingly we can now put a cash value not just on individual pieces the airline sells like checked bags, but also on packages of benefits that approximate a lowest tier of elite status.

For folks who fly the airline a handful of times but not enough for status, then getting the airline’s co-branded credit card makes sense at $95 considering that it comes with a checked bag and priority boarding.

But for the one-off, these packages can make sense, at least for folks who are going to check a bag, who place a premium on not having to gate check their carryon, and who have some risk they may have to make a change to their ticket.

Update: I asked American what would happen to your bonus miles earning if you bought a Choice Plus fare one-way and a premium cabin fare the other. I’m told you would earn the bonus miles applicable to each segment — so Choice Plus outbound would earn 50% bonus, premium fare return would earn 25% class of service bonus.